What main legislation is applicable to insolvencies and reorganisations?
The Corporations Act 2001 (Cth) (the Act) is the primary piece of federal legislation that governs the registration, administration, insolvency and reorganisation of companies incorporated in Australia. The Act prescribes, among other things, the manner to administer and regulate the winding up, liquidation, administration and distribution of assets vested in insolvent corporations and other prescribed commercial vehicles.Excluded entities and excluded assets
What entities are excluded from customary insolvency or reorganisation proceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?
The Act governs the insolvency proceedings for all companies incorporated in Australia and companies incorporated or possessing separate legal personality in foreign jurisdictions that carry on business in Australia. It also governs building societies, credit unions and managed investment schemes.
The provisions of the Act do not govern the potential insolvency proceedings for: government agencies; state or federal corporate bodies; and entities created by statute that are not companies.
The individual statutes creating these bodies will normally provide for their dissolution or winding up.Public enterprises
What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?
There is no precedent in Australia for a government-owned enterprise becoming insolvent. Generally, each government-owned enterprise is established under a specific piece of legislation separate to the Act (be it federal or at a state level). This legislation will provide for the winding-up procedure and remedies creditors may have available (noting they are limited compared to a corporate insolvency). Importantly, the test for insolvency is often different under such legislation. As noted, creditors of public enterprises do have remedies; however, as the provisions vary from enterprise to enterprise, and as there has never been an actual example of these provisions being tested, it is difficult to generally comment on how they would work in practice.Protection for large financial institutions
Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?
No.Courts and appeals
What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?
The Federal Court of Australia and the Supreme Courts of each state and territory have jurisdiction to hear matters relating to the insolvency of a corporation (both civil and criminal offences arising from insolvency proceedings). Matters pertaining to debt recovery and monetary compensation can also be dealt with by other courts such as district courts, county courts and magistrates’ courts within their jurisdictional limits. The judicial institutions have discretion to transfer matters between them if considered appropriate. It is generally only the Federal Court and the Supreme Courts that have jurisdiction to wind up a company.
An appellant has an automatic right to appeal any final decision of the court, including an order for the winding up of a company.
Three of the more common insolvency processes (voluntary administration, deeds of company arrangement and receivership) often have no court involvement.
TYPES OF LIQUIDATION AND REORGANISATION PROCESSESVoluntary liquidations
What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?
Under the Act, both the members of the company and the creditors have the option, under certain circumstances, to commence a voluntary winding up of a company. Neither procedure requires court sanction. The determinative factor for which a voluntary regime may be pursued is the company’s solvency position.Members’ voluntary winding up
A members’ voluntary liquidation is a solvent winding up. It requires that the directors of the company make a declaration of solvency under section 494 of the Act. The declaration of solvency requires that the directors of the company must form the opinion, after an inquiry into the affairs of the company, that the company will be able to discharge its debts in full within 12 months of the commencement of winding up. This is coupled with a special resolution (ie, at least 75 per cent of votes cast by members entitled to vote on the resolution) of the members to wind up the company. Subsequently, a copy of this resolution must be lodged with the Australian Securities and Investments Commission (ASIC) within seven days, to be published in the gazette within 21 days.Creditors’ voluntary winding up
A creditors’ voluntary winding up arises when the company is in fact insolvent. It can occur in a number of circumstances, including in situations where a liquidator appointed by the members forms the opinion that the company is in fact insolvent. This will convert the process from a members’ voluntary winding up into a creditors’ voluntary winding up. A company may also enter a creditors’ voluntary winding up at the end of an administration if the creditors resolve to at the second creditors’ meeting.Voluntary reorganisations
What are the requirements for a debtor commencing a voluntary reorganisation and what are the effects?Voluntary administration
The purpose and operation of voluntary administration is outlined in Part 5.3A of the Act. Voluntary administration has been compared to the Chapter 11 process in the United States; however, unlike the Chapter 11 process, voluntary administration is not an ‘in situ’ debtor process. In a voluntary administration, the creditors control the outcome to the exclusion of management and members. The creditors ultimately decide on the outcome of the company, and in practice it rarely involves returning management of the company back to the former directors.
The purpose of Part 5.3A is to administer the business, property and affairs of the insolvent company in a way that either: maximises the chances of the company, or as much as possible of its business, continuing in existence; or results in a better return for the company’s creditors and members than would result from an immediate winding up, if it is not possible for the company or its business to continue in existence.
There are three possible ways an administrator may be appointed under the Act:
- by resolution of the board of directors that in their opinion the company is, or is likely to become, insolvent;
- a liquidator or provisional liquidator of a company may, by writing, appoint an administrator of the company if he or she is of the opinion the company is, or is likely to become, insolvent; and
- a secured creditor who is entitled to enforce security over the whole or substantially whole of a company’s property may, by writing, appoint an administrator if the security interest is over the property and is enforceable.
An administrator has wide powers and will manage the company to the exclusion of the existing board of directors. Once an administrator is appointed, a statutory moratorium is activated that restricts the exercise of rights by third parties under leases and security interests and in respect of litigation claims. The purpose of this statutory moratorium is to allow the administrator the opportunity to investigate the affairs of the company, and either implement change or be in a position to realise value, with protection from certain claims against the company. A secured creditor with security over the whole or substantially the whole of the assets of the company has 13 business days following the appointment of the administrator to exercise its right under the security granted in its favour (ie, appoint a receiver).
There are two meetings over the course of an administration that are critical to the outcome of the administration. Once appointed, an administrator must convene the first meeting of creditors within eight business days (at this meeting, the identity of the voluntary administrator is confirmed, the remuneration of the administrator is approved, and a committee of creditors may be established). The second creditors’ meeting is normally convened 20 business days after the commencement of the administration (this may be extended by application to the court). At the second meeting, the administrator provides a report on the affairs of the company to the creditors and outlines the administrator’s views as to the best option available to maximise returns. There are three possible outcomes that can be put to the meeting: enter into a deed of company arrangement (DOCA) with creditors (discussed further below); wind the company up; or terminate the administration.
The administration will terminate according to the outcome of the second meeting (ie, either by progressing to liquidation, entry into a DOCA or returning the business to operate as a going concern (although this is rare)). When the voluntary administration terminates, a secured creditor that was estopped from enforcing a security interest because of the statutory moratorium becomes entitled to commence steps to enforce that security interest unless the termination is because of the implementation of a DOCA approved by that secured creditor.DOCA
A DOCA is effectively a contract or compromise between the company and its creditors. Although closely related to voluntary administration, it should in fact be viewed as a distinct regime, where the rights and obligations of the creditors and company differ from those under a voluntary administration.
A DOCA may incorporate terms that make its operation similar to a voluntary administration (giving similar rights to a deed administrator as a voluntary administrator), but may also provide for, inter alia, a moratorium of debt repayments, a reduction in outstanding debt and the forgiveness of all, or a portion of, the outstanding debt. It may also involve the issuance of shares and can be used to achieve a debt-for-equity swap.
Entering into a DOCA requires the approval of a bare majority of creditors, both by value and number voting at the second creditors’ meeting. A DOCA will bind the company, its shareholders, directors and unsecured creditors.
Upon the execution of a DOCA, the voluntary administration terminates. The outcome of a DOCA is generally dictated by the terms of the DOCA itself. Typically, however, once a DOCA has achieved its goal it will terminate. If a DOCA does not achieve its goals or is challenged by creditors it may be terminated by the court.Schemes of arrangement
A scheme of arrangement is a restructuring tool that sits outside of formal insolvency: the company may become subject to a scheme of arrangement whether it is solvent or insolvent.
A scheme of arrangement is a proposal put forward (with input from management, the company or its creditors) to restructure the company in a manner that includes a compromise of rights by any or all stakeholders. The process is overseen by the courts and requires approval by all classes of creditors. The pre-existing management retains control of the company during the process (and also depending on the terms of the scheme itself after its implementation). In recent times, schemes of arrangement have become more common, in particular for complex restructures involving debt-for-equity swaps in circumstances where the number of creditors within creditor stakeholder groups may make a contractual and consensual restructure difficult.
A scheme of arrangement must be approved by at least 50 per cent in number and 75 per cent in value of creditors in each class of creditor. Classes are determined by reference to commonality of legal rights and only those creditors whose rights will be affected, compromised or amended by the scheme need be included. It must also be approved by the court to become effective. The test for identifying classes of creditors for the purposes of a scheme is that a class should include those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to a ‘common interest’. The outcome of a scheme of arrangement is dependent on the terms of the arrangement or compromise agreed with the creditors, but most commonly, upon implementation, a company is returned to its normal state as a going concern but with the relevant compromises having taken effect.
The scheme of arrangement process does, however, have a number of limiting factors associated with it, including cost, complexity of arrangements (ie, class issues), uncertainty of implementation, timing issues (ie, because of various procedural requirements for holding the meetings, and as it must be approved by the court it is subject to the court timetable and can only be expedited to a certain extent) and the overriding issue of court approval (ie, a court may exercise its discretion to not approve a scheme of arrangement, despite a successful vote, if it is of the view that the scheme of arrangement is not equitable).
These factors explain why schemes of arrangement tend only to be undertaken in large corporate restructures and in scenarios with sufficient time for execution and implementation to accommodate the procedural and courts’ requirements.Successful reorganisations
How are creditors classified for purposes of a reorganisation plan and how is the plan approved? Can a reorganisation plan release non-debtor parties from liability, and, if so, in what circumstances?Scheme of arrangement
A scheme of arrangement must be approved by a majority of creditors voting on the resolution and holding at least 75 per cent in value and 50 per cent in number of voting creditors in each class. Classes are determined by reference to commonality of legal rights and only those creditors whose rights will be affected, compromised or amended by the scheme need be included. If approved by the creditors, supplementary approval by the court is required at the second court hearing. Schemes of arrangement may provide for the release of third parties (as opposed to DOCAs where the courts have held that such releases are not possible).DOCA
In the context of a voluntary administration, a majority of creditors with at least 50 per cent in number and 50 per cent in value may resolve that the company should execute a DOCA. The company must execute the instrument within 15 business days of such a resolution. A DOCA can be varied by either a subsequent resolution of creditors or by the court. A DOCA will bind the company, its shareholders, directors and unsecured creditors. A validly passed DOCA can bind all creditors but does not prevent a secured creditor from dealing with their security interest so long as the secured creditor does not vote in favour of the DOCA. Unlike a scheme of arrangement, court approval is not required for a DOCA to be implemented provided it is approved by the requisite majority of creditors.Involuntary liquidations
What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?
Under Australian law, a compulsory liquidation involves the application to and orders from the court. A creditor or other eligible applicant must lodge an application with the court to wind up a company. On an application to wind up the company in insolvency, the creditor must show that the company is unable to pay its debts as and when they fall due.
There are two situations in which a company will be held to be unable to pay its debts: if the company has not paid a claim for a sum due to a creditor exceeding A$2,000 within 21 days of service of a prescribed written statutory demand (the Act sets out specific requirements); or if it is proved to the court as a question of fact that the company is unable to pay its debts as and when they fall due.
Grounds are also available for a creditor to apply to the court for winding-up orders against a company not necessarily related to solvency, including that it is ‘just and equitable’ to do so or because of a deadlock at a shareholder or director level affecting the ability to manage the company.
After a winding-up order, management of the company is removed from the directors and the company will likely cease as a going concern (except as is necessary to proceed with the winding up). The liquidator appointed will take control of the affairs of the company and his or her duties include realising the company’s assets for the benefit of the creditors as a whole.
There are no material differences between a liquidation ordered by the court and a creditors’ voluntary liquidation.Involuntary reorganisations
What are the requirements for creditors commencing an involuntary reorganisation and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?Receivership
Unlike in the United Kingdom, receivership is still an option available to secured creditors in Australia. Receiverships, particularly coordinated appointments at a holding company level, can and have been used to effect corporate restructures and reorganisations.
There are two ways in which a receiver or receiver and manager may be appointed to a debtor company. The most common manner is pursuant to the relevant security document granted in favour of the secured creditor when a company has defaulted and the security has become enforceable. Far less common in practice is the appointment of a receiver pursuant to an application made to the court. Court appointments are usually done to preserve the assets of the company in circumstances where it may not be possible to otherwise trigger a formal insolvency process. However, given the infrequency of court-appointed receivers, this chapter focuses on privately appointed receivers.
For a privately appointed receiver, the security document itself will entitle a secured party to appoint a receiver and will also outline the powers available (supplemented by the statutory powers set out in section 420 of the Act). Generally, a receiver has wide-ranging powers including the ability to operate, sell or borrow against the secured assets. The appointment is normally effected contractually through a deed of appointment and indemnity, and the receiver will be the agent of the debtor company, not the appointing secured party.
On appointment, a receiver will immediately take possession of the assets subject to the security. Once in control of the assets, the receiver may elect to run the business if the receiver is appointed over all or substantially all of the assets of a company. Alternatively, and depending on financial circumstances, a receiver may engage in a sale process immediately. While engaging in a sale process, a receiver is under a statutory obligation to obtain market value, or in the absence of a market, the best price obtainable in the circumstances. This obligation is enshrined in section 420A of the Act. It is this duty that has traditionally posed the most significant stumbling block to the adoption of pre-packaged restructure processes through external administration. Often referred to as a ‘prepack’, this is where a restructuring is developed by the secured lenders prior to the appointment of a receiver and is implemented immediately or very shortly after the appointment is made. There is a concern that a pre-packaged restructuring that involves a sale of any asset without testing against the market could be seen to be in breach of the duty under section 420A. Sales processes conducted immediately prior to appointment or the potential for immediate dilution of value are increasingly facilitating receivership sales without a full testing of the market.
Once a receiver has realised the secured assets and distributed the net proceeds to the secured creditors (returning any surplus to subordinated security holders or the company) he or she will retire in the ordinary course.
The appointment of a receiver to all or substantially all of the assets of a company will usually lead to, or will closely follow, the appointment of voluntary administrators by the directors, with both processes proceeding in tandem.Voluntary administration
As referred to in question 7, a secured creditor can often appoint an administrator to effect a reorganisation as an alternative to exercising its security. Once the voluntary administration occurs, the creditors are in control of the company’s fate (including any restructuring or reorganisation), the success of which will be dependent on the relevant majority, by number and dollar value, voting in favour of it. The effects of this procedure are referred to in questions 7 and 8, ‘voluntary administration’ and ‘DOCA’.Expedited reorganisations
Do procedures exist for expedited reorganisations (eg, ‘prepackaged’ reorganisations)?
The voluntary administration regime was introduced into the Act to provide distressed companies with a process to initiate an expedited reorganisation without court approval. A voluntary administrator is required to complete the investigations relating to the company’s business, property, affairs and financial circumstances about four to six weeks after his or her appointment. The administrator is then required to convene a creditors’ meeting at which the administrator provides the creditors with a detailed report of the investigation and recommendations.
The creditors then decide between three alternatives: to execute a DOCA, to wind up the company or to end the administration. There is no legislation that specifically facilitates pre-packaged reorganisation (Productivity Commission Inquiry Report ‘Business Set-up, Transfer and Closure’ dated 30 September 2015 (www.pc.gov.au/inquiries/completed/business/report/business.pdf, accessed 9 November 2019)).
As to a ‘pre-packaged restructure’ in the context of a receivership, see question 10.Unsuccessful reorganisations
How is a proposed reorganisation defeated and what is the effect of a reorganisation plan not being approved? What if the debtor fails to perform a plan?Scheme of arrangement
A scheme of arrangement may either be defeated by a creditors’ vote or if it is not sanctioned by the court. Should either of these occur, there is no automatic process that occurs; rather, the company reverts to its pre-existing state (which may include financial difficulties).DOCA
A proposed reorganisation through a DOCA may be defeated by a majority of creditors at the second meeting. At this meeting, the creditors may vote for the company to be wound up or to give back control of the company to the directors, thus ending the administration, rather than executing a DOCA. Further, if the company fails to execute a DOCA within 15 business days of a successful resolution at a second creditors’ meeting, the company will enter into a creditors’ voluntary winding up. Once executed, if there is a material contravention of the DOCA by the debtor company, a creditor or other interested person may apply for the termination of an executed DOCA by an order of the court. If an order is granted, the company again enters into a creditors’ voluntary winding up.
An aggrieved creditor might also look to terminate a DOCA on the grounds of, for example, unfair prejudice.Corporate procedures
Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?
Deregistration can be voluntary upon the application of the company, a director, a member or a liquidator, and can be initiated by ASIC or court-ordered in circumstances where the company has no assets or liabilities, or its winding up has been finalised. Upon the deregistration of the company, it ceases to exist as a corporate identity.
In addition, ASIC may unilaterally deregister a corporation if it has reason to believe that the company is no longer carrying on its business, has been fully wound up, has been at least six months late in lodging its annual return or has not lodged the relevant corporate documentation (including financial reports) required by the Act in the preceding 18 months. There is, however, a process under the Act for the reinstatement of deregistered companies in certain circumstances.Conclusion of case
How are liquidation and reorganisation cases formally concluded?Voluntary administration
As described above, there are three outcomes of a voluntary administration upon which the creditors decide: entering into a DOCA; winding the company up; or terminating the administration.
The outcome chosen will dictate how the voluntary administration ends. Once a DOCA is executed, the company comes out of voluntary administration, and if the administration terminates, the administrative control vests back in the board of directors.Liquidation
At the conclusion of a liquidation, the company is deregistered. The process of deregistration is regulated by Chapter 5A of the Act. After the company’s affairs are fully wound up, the liquidator must produce an account showing how the winding up has been conducted and the company’s property disposed of. ASIC must deregister the company when three months have elapsed after the liquidator has lodged the account, or minutes if a final meeting is held, with ASIC.
In a compulsory winding up, the liquidator may also apply to the court, pursuant to section 480 of the Act, for an order that the liquidator be released and that the company be deregistered after the liquidator has: realised all the property of the company or so much of that property as can in his or her opinion be realised without needlessly protracting the winding up; distributed a final dividend (if any) to the creditors; adjusted the rights of the contributories among themselves; and made a final return (if any) to the contributories. The court must be satisfied that no creditor will be adversely affected by the order.Receivership
A receivership concludes when the secured assets are realised and the secured creditors are repaid (either in full or where there are no further assets to realise, to the maximum extent possible). In such circumstances, control of the company is handed back to either the directors or voluntary administrator, and in most instances the company is deregistered or wound up.
INSOLVENCY TESTS AND FILING REQUIREMENTSConditions for insolvency
What is the test to determine if a debtor is insolvent?
Section 95A of the Act states that a company is solvent if it can pay its debts as and when they become due and payable. A company that cannot pay its debts when due and payable, or in other words is not solvent, is insolvent.
The focus in Australian case law is the cash-flow position of the company as opposed to a balance-sheet test. The courts have held that any assessment of solvency should be considered in light of the commercial reality of the company’s financial position taken as a whole as opposed to a point-in-time assessment of the balance sheet taken in isolation.Mandatory filing
Must companies commence insolvency proceedings in particular circumstances?
When a company is insolvent or likely to become insolvent, its board of directors can appoint a voluntary administrator under Part 5.3A and the appointment itself is a defence under the Act to insolvent trading. There is, however, no explicit statutory provision obliging companies to commence such insolvency proceedings. Refer to the directors’ duties to prevent insolvent trading discussed in question 17.
DIRECTORS AND OFFICERSDirectors’ liability – failure to commence proceedings and trading while insolvent
If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?
Under section 588G of the Act, directors have a duty to prevent insolvent trading. If a company enters into liquidation, Part 5.7B, division 4 makes directors who breach this duty liable to compensate the company for all new debts incurred from the time a company is found to have become cash-flow insolvent. Therefore, a director may suffer civil or criminal liability for insolvent trading where he or she knew, or had reasonable grounds for suspecting, that the company was insolvent or would become insolvent. These provisions are intended to compel directors to take active steps (such as the appointment of a voluntary administrator) in an expeditious manner, thereby protecting members and creditors from the continuation of insolvent businesses.
In addition to the potential liability for directors, if the company continues to carry on business while insolvent, certain transactions that the company entered into with third parties during that time may be subject to challenge and ultimately be held to be void if the company formally enters into liquidation (for example, unfair preference or uncommercial transaction). See question 46 for further information.Directors’ liability – other sources of liability
Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganisation actions? Can they be subject to sanctions for other reasons?
A director or officer of a company may be held liable under the Act for civil and criminal penalties or to compensate the company if the company incurs a debt while insolvent (otherwise known as insolvent trading). Directors and officers may also attract personal liability for breaching their statutory duties of reasonable care and diligence in the exercise of their powers and to act in good faith and for proper purposes. Statutory liability may also be imposed where directors or officers improperly use their position or information acquired because of their position to gain an advantage for themselves or cause detriment to the company.
In some situations, directors may become personally liable for unremitted amounts of income tax or goods and services tax. The Commissioner of Taxation must give 14 days’ notice to the directors setting out the details of the unpaid amount and the penalty. Directors may avoid a penalty if the company pays the unremitted amount, the company enters into an agreement relating to the unremitted amount, an administrator is appointed or the company goes into liquidation.
The courts maintain discretion under the Act to excuse directors from liability in some circumstances if they can be shown to have acted honestly and reasonably.Directors’ liability – defences
What defences are available to directors and officers in the context of an insolvency or reorganisation?
The statutory defences available to a director for a breach of the duty to prevent insolvent trading are set out in section 588H of the Act. A director is not liable for a breach of duty if it is proved that, at the time the relevant debt was incurred, the director had reasonable grounds to expect and did expect that the company was solvent at that time and would remain solvent even if it incurred that debt (as well as any other debts that it incurred at the same time).
Further, a director is not liable if it is proved that he or she took all reasonable steps to prevent the relevant debt being incurred. In this context, the Act states specifically that matters to which regard is to be made in considering this defence include any action the director took with a view to appointing an administrator when such action was taken and the results of that action.
A breach of the duty to prevent insolvent trading by a director will expose that director to prospective liability for a civil penalty order, an order for payment of compensation to the company or an order for payment of compensation to the creditor. The amount of compensation awarded against a director who breaches such a duty will be calculated by reference to the actual loss that the company or the creditor suffers by reason of the debt being incurred. In ascertaining the quantum risk of a potential insolvent trading action, the question as to when a debt is incurred becomes important. Ordinarily, a director will not be liable for a pre-existing debt that falls due when a company is found to be insolvent. Rather, directors are liable if the debt is ‘incurred’ at a time when the company is insolvent.
With effect from September 2017, a new section, 588GA, was introduced into the Act to afford directors protection in certain circumstances to enable a company to delay entering into a formal insolvency process and instead pursue a turnaround plan (ie, provide directors with a ‘safe harbour’ protection). Under this new section, a director will not be liable for debts incurred by a company while it is insolvent if, ‘at a particular time after the director starts to suspect the company may become or be insolvent, the director starts developing one or more courses of action that are reasonably likely to lead to a better outcome for the company’ than the ‘immediate appointment of an administrator or liquidator to the company’.
A director that seeks to rely upon section 588GA of the Act bears the evidential burden in relation to that matter. That is, adducing or pointing to evidence that suggests a reasonable possibility that the matter exists or does not exist. The safe harbour protection will not apply in certain circumstances, including where, at the time the debt is incurred, the company has failed to pay employee entitlements or comply with certain reporting or taxation requirements. The new safe harbour provision also extends to providing a safe harbour for holding companies from liability to compensate its subsidiaries’ creditors where directors of those subsidiaries hold the benefit of the safe harbour. Holding companies bear the same evidential burden as directors to adduce evidence that suggests a reasonable possibility that the company took steps to ensure that the directors did enjoy the benefit of the safe harbour provisions.
While the introduction of this ‘safe harbour’ provision is seen as a positive development, section 588GA of the Act will not provide protection for directors against more general breach of duty claims.Shift in directors’ duties
Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganisation proceeding is likely? When?
In discharging their duty to act in good faith and in the best interests of a company, directors must have regard to the interests of the company’s creditors as the company is nearing insolvency.
However, it is not an independent duty to creditors, and any claim must be brought by the company (or more likely, its external administrators).Directors’ powers after proceedings commence
What powers can directors and officers exercise after liquidation or reorganisation proceedings are commenced by, or against, their corporation?
Upon the appointment of a voluntary administrator or while the company is being wound up, company officers are not removed from office but, in general, they cannot, without the administrator or liquidator’s written approval, perform or exercise a function or power as an officer of the company.
If the receiver is appointed over all or most of the assets of a company, the receiver effectively has control, although the directors still have certain responsibilities and duties, and may retain residual control.
MATTERS ARISING IN A LIQUIDATION OR REORGANISATIONStays of proceedings and moratoria
What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganisations? In what circumstances may creditors obtain relief from such prohibitions?
From 1 July 2018, amendments to the Act to impose an automatic stay on the enforcement of ipso facto clauses in certain contracts entered into on or after 1 July 2018 (Automatic Stay) came into operation.
The Automatic Stay applies where one of the following insolvency events occurs in relation to a company:
- voluntary administration;
- a receiver or controller is appointed over the whole or substantially the whole of the company’s assets;
- the company announces, applies for or becomes subject to a scheme of arrangement to avoid a winding up; or
- the appointment of a liquidator immediately following an administration or a scheme of arrangement.
The Automatic Stay does not apply retrospectively (ie, for agreements entered into prior to the new provisions coming into force on 1 July 2018). Relevantly, the Automatic Stay does not apply to other types of contractual defaults - for example, if the company has failed to meet its payment or other performance obligations under the relevant agreement.
The length of the Automatic Stay depends on which formal insolvency process applies to the company, as follows (subject to courts order extending the stay):
- in the case of a scheme of arrangement: the stay will end within three months of the announcement, or where an application is made within that three months, when the application is withdrawn or dismissed by the court or when the scheme ends or the company is wound up;
- in the case of a receivership or managing controllership: the stay will end when the receiver’s or managing controller’s control ends; and
- in the case of a voluntary administration: the stay will end on the latest of when the administration ends or the company is wound up.
The scope of the Automatic Stay, specifically what contract types, rights and self-executing provisions are excluded by the Automatic Stay are set out in the Corporations (Stay on Enforcing Certain Rights) Regulations 2018 (Regulations) and the Corporations (Stay on Enforcing Certain Rights) Declaration 2018 (Declaration). The Regulations prescribe the types of contracts, agreements or arrangements that are excluded from the operation of the Automatic Stay and rights in those kinds of arrangements remain available to the parties to those arrangements should a trigger event occur. The Declaration declares the various rights (including self-executing clauses that, when executed, provides those rights) that are excluded from the operation of the Automatic Stay and those rights that remain available to the parties should a trigger event occur.
The Automatic Stay does not prevent secured creditors from appointing a receiver during the decision period pursuant to section 441A of the Corporations Act (if they have security over the whole or substantially the whole of the company’s property) or enforcing security interests over perishable goods or prevent secured creditors or receivers from continuing enforcement action that commenced before the administration.Receivership
Further to our comments above, during a receivership no moratorium exists, and creditors may take action against the company including initiating court proceedings, but such actions are treated as unsecured claims (subordinated to the claims of the secured creditors who appointed the receiver). The receiver is likely to be in control of the company’s material assets and is permitted to realise such assets for the benefit of the secured creditor only (any surplus is provided to the company and would be available for distribution to unsecured creditors).Voluntary administration
In addition to the Automatic Stay referred to above, the Act provides for a moratorium over legal proceedings as an automatic consequence of a company entering into voluntary administration. Consequently, no legal proceedings can be initiated or proceeded with except with the administrator’s written consent or leave of the court. An exception, however, is made in the case of criminal proceedings.
The Automatic Stay referred to above does not apply once, or if, a company executes a deed of company arrangement (DOCA). The Automatic Stay ends when the ‘administration ends’, that is, when a DOCA is executed by the company and the Deed Administrator. Accordingly, if a company does execute a DOCA and needs the protection of the Automatic Stay, then subject to limited exceptions, it will need to obtain court orders.Liquidations
The Automatic Stay does not apply where a liquidator is appointed, unless the liquidation immediately follows an administration or a scheme of arrangement.
After the commencement of a winding up of a company, or after appointment of a provisional liquidator, legal proceedings are not to be commenced or continued against a company without leave of the court, pursuant to section 471B of the Act. Secured creditors are generally granted immunity from this process by section 471C, assuming the validity of their security, as they remain entitled to realise their security despite the liquidation.
Where a statutory moratorium exists, while not determinative, a court is more likely to grant leave for a claimant to proceed against the company if there is a public interest aspect to the claim, such as in the case of claims brought by regulators for statutory breaches, or where the claimant will have access to insurance proceeds.Doing business
When can the debtor carry on business during a liquidation or reorganisation? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?
During an informal reorganisation or formal scheme of arrangement, the ability of a debtor company to carry on its business will depend upon the terms of agreement with its creditors.
This position differs, however, if the restructuring occurs within the context of a receivership or an administration. Control of the company is transferred from the directors to the administrator or receiver. An administrator has wide-ranging powers to carry on the business of the company where that is consistent with the purpose of the administration, whereas a receiver has wide-ranging powers provided for under the Act and the security agreement itself.
For the purposes of carrying on the business, the administrator has the power under section 437A to pay creditors who supply goods or services to the company after the company has gone into administration in preference to ordinary unsecured creditors. An administrator may seek directions from the committee of creditors (see question 33) or from the court. Creditors may also apply for relief against the administrator, which could involve removal.
A receiver may continue to run the business as a going concern with a view to maximising the return available to the secured creditor. Services engaged (including the providers of goods and services) are treated as costs of the receivership and the preferential payment of these costs is provided for in the appointment document. The sale of the assets of the business is addressed in question 25.
Generally, after formal insolvency proceedings are commenced, the power and roles of company officers are at the discretion of the insolvency administrator appointed (receiver, administrator or liquidator) who is ultimately responsible for those roles (for example, carrying on the business of the company). In an informal workout where there has been no formal appointment, the company officers continue to be able to exercise all powers unless otherwise agreed with creditors.Post-filing credit
May a debtor in a liquidation or reorganisation obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?Voluntary administration
A voluntary administrator is given the power under section 437A of the Act to manage the affairs of the company and to raise loans on security over company assets to carry on the business of the company. The repayment of this credit is treated as an expense of the administration and is given statutory priority over ordinary unsecured creditors.DOCA
Whether a deed administrator has the power to raise loans will depend on the terms of the DOCA. The repayment of this credit will usually be treated as an expense of the deed administration and will be given priority over distributions to creditors.Liquidation
Liquidators are expressly permitted to obtain credit under section 477, whether on the security of company property or otherwise, as far as is necessary for the beneficial disposal or winding up of the company. Such credit will have priority over ordinary unsecured creditors but only in respect of the new funds and up to the value of the security.Receivership
The terms of the appointment document and section 420 of the Act provide receivers with wide-ranging powers (including the ability to borrow). These borrowings are treated as expenses of the receivership and are provided priority, or alternatively the original security document may provide that this financing is to be afforded the same priority as the first-ranking security.Schemes of arrangement
Obtaining financing and use of assets as security in a scheme of arrangement or an informal voluntary reorganisation is solely a matter for agreement between the company and its creditors.Sale of assets
In reorganisations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?Receivership
As noted, a receiver is under a statutory obligation to obtain market value or, in the absence of a market, the best price obtainable in the circumstances under section 420A of the Act. Upon a sale, the receiver will transfer the assets free of security interests (a release will be provided by the appointing secured creditor) and often the terms of any inter-creditor arrangements will provide for the automatic release of subordinated security. In circumstances where an automatic release mechanism is not provided for, direct negotiations will need to take place with the secured subordinated creditors.Voluntary administration
A voluntary administrator may sell assets, noting, however, it is not permitted to sell assets subject to security without consent (normally, a receiver will be appointed and have control over such assets). Administrators can apply to the court if this consent is not given and the court may make an order if it is satisfied that the secured creditor is adequately protected.Liquidations
Liquidators appointed in the context of either voluntary or compulsory liquidations can sell or otherwise dispose of unencumbered property of the company without needing to seek approval from the court or other parties to the liquidation. The purchaser will acquire the assets unencumbered unless there are debts or liabilities passing to the purchaser as provided for in the sale documentation. If assets are encumbered, consent of the encumbrancer will be required unless a court directs otherwise.
A liquidator owes fiduciary duties to the company. In realising company property, a liquidator (or administrator) has a duty to obtain the highest possible price for the assets of the company, keeping in mind that the winding up should not be unnecessarily protracted. Property may be sold in any way the liquidator deems fit, including private contract and, usually, public auction. While creditors may purchase assets of the company, the purchase price will not be able to be set off against the debt owed to the creditor by the company. Instead, any funds raised by the sale of company property will be for the benefit of the creditors as a whole, to be distributed according to the relevant distribution rules.Schemes of arrangement
The terms of the scheme itself will provide for the disposal of assets and any associated release of security required. These releases will not be automatic, however, and will need either agreement from the creditors or the provision of such release in associated finance and security documents.Informal reorganisations
In an informal reorganisation of a company, the conditions of the reorganisation and sale or use of assets are as negotiated with the relevant creditors.Negotiating sale of assets
Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?Stalking horse bids
While there is nothing to prevent stalking horse bids, they seldom occur in the Australian context.Credit bids
Credit bids are permissible under Australia law and are a means of pursuing loan-to-own strategies. The offer will be assessed in the context of the relevant sales process conducted and the nature of the insolvency administration to which the company is subject. Courts generally have limited involvement in assessing a credit bid (save as part of a scheme of arrangement or where a sale has been challenged). In these circumstances, the court will scrutinise the credit bid together with the situation generally, against other proposals received and in light of any sale process run (if required). There is no prohibition on an assignee of the original secured creditor making a credit bid (provided the assignment was valid under law).Rejection and disclaimer of contracts
Can a debtor undergoing a liquidation or reorganisation reject or disclaim an unfavourable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?
Liquidators are given the specific ability to disclaim property or uncommercial contracts under Part 5.6, division 7A of the Act. A liquidator can, subject to objections being made to the court by aggrieved parties, disclaim onerous property in writing. Court approval is required for disclaiming contracts as this is likely to adversely affect third-party interests. There are no specific provisions for disclaimers in a voluntary liquidation, although the court has wide powers to control these reorganisations and application can be made to the court.
Receivers and administrators are not given specific powers to disclaim contracts; they may, however, look to ignore contracts with any resulting damages claim being unsecured against the company (not the receiver or the administrator personally).
If the debtor (either acting by the insolvency administrator appointed or otherwise) breaches the contract after formal insolvency has commenced, then the aggrieved counterparty has all remedies available to it under contract law (including claim for damages and any right to terminate). Any such damage will be an unsecured claim as against the debtor company itself and only in very limited circumstances will an order for specific performance be made against the debtor company.Intellectual property assets
May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganisation is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?
Pre-existing contractual arrangements will govern a licensor’s ability to terminate a debtor’s entitlement to use intellectual property. These rights may be affected by the Automatic Stay provisions (ie, the ‘ipso facto’ protection) referred to in question 22, where the debtor enters into a relevant formal insolvency process.
A company administrator’s power under section 437A to carry on and manage the property of the business extends to the use of intellectual property granted under an agreement with the debtor. Likewise, a receiver, in the absence of a licensor exercising termination rights, may also continue to use intellectual property.Personal data
Where personal information or customer data collected by a company in liquidation or reorganisation is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?
There are no restrictions on the use of personal information or customer data that apply in an insolvency that would not have otherwise applied to use by the company in a solvent context. For example, while there are restrictions against the use of personal information under Australian privacy laws, those laws will generally not prevent the transfer of that information to a purchaser as part of the sale of the company’s business.
An administrator’s power under section 437A to carry on and manage the property of the business extends to the use of customer data collected by the company in its business. Likewise, a receiver, in the absence of specific contractual terms to the contrary, may also continue to use customer data collected by the company in the course of the business.Arbitration processes
How frequently is arbitration used in liquidation or reorganisation proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganisation case is opened be arbitrated with the consent of the parties?
There are no restrictions under Australian law preventing a distressed company or its creditors from pursuing alternative dispute resolution options, such as arbitration or mediation. The success or willingness to engage in these procedures will obviously be dictated by the parties involved. These arrangements, however, are not without their limitations. For example, there is no obligation on creditors to agree to an informal arrangement and any one creditor can veto a proposed arbitration or mediation outcome if its rights with regard to the other creditors are directly affected (or act outside its restrictions). Its non-binding nature provides sufficient disincentive for creditors to consider these procedures, and it is rarely seen.
Courts will generally allow arbitration proceedings to continue while insolvency proceedings remain open to aid the just and expeditious resolution of creditors’ claims.
CREDITOR REMEDIESCreditors’ enforcement
Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?
The main way in which a secured creditor may enforce its security over assets of the company outside of court proceedings is through the private appointment of a receiver as discussed in question 10. The security agreement (ie, charge or mortgage) will normally grant the secured creditor the ability to appoint a receiver. Once appointed, the receiver will realise the company’s assets solely for the benefit of the secured creditor to the exclusion of the rest of the company’s creditors. A creditor may also exercise rights as mortgagee in possession and take control of the property with a view to realising value.
Retention of title clauses are another way a creditor may enforce proprietary and contractual rights outside court proceedings. If effective, this will allow the creditor to reclaim property supplied to the company in the event of the company’s receivership, administration or liquidation. Retention of title clauses fall within the definition of ‘security interest’ under the Personal Property Securities Act 2009 (PPSA) and are therefore required to be registered under the provisions of the PPSA. A traditional retention of title arrangement will be considered a ‘purchase money security interest’ under the PPSA, and, upon registration, will give the holder priority over other registrable interests. In this sense, while the requirements for enforcing a retention of title clause will change, the effect shall remain the same.
A number of common law and statutory liens are also available (and do not require registration under the PPSA).Unsecured credit
What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?
A creditor may commence proceedings through the courts to recover outstanding amounts owing by a recalcitrant debtor company. A creditor, at the same time, may also request that the court order injunctive relief to freeze the assets of the company if there is a risk of assets or value being dissipated. A failure to plead a substantive defence will generally enable a default judgment to be granted and the creditor may, after this, take steps to wind the debtor company up.
The court has extensive powers to compel compliance and enforce a range of remedies including seizure of assets, diversion of a debtor company’s income and orders for winding up of the company. Foreign creditors may be required to provide security for costs (ie, a sum of cash to the courts) of enforcing a judgment in Australia.
The options available to unsecured creditors of an insolvent company or company in distress are limited. Once a company is placed into administration or liquidation, a statutory moratorium will apply to any proceedings commenced, including any enforcement proceedings. The statutory moratorium is addressed in greater detail in question 22.
CREDITOR INVOLVEMENT AND PROVING CLAIMSCreditor participation
During the liquidation or reorganisation, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?Meetings and notices - voluntary administration
Notice of the appointment of an administrator must be lodged with ASIC within one day and creditors must be notified of the appointment within three days.
The administrator must convene a meeting of creditors within eight business days of his or her appointment. Notice of this meeting must be given in writing to as many creditors as is reasonably practicable at least five business days before the meeting and published on ASIC’s insolvency notices website. At this meeting, creditors have the opportunity to appoint a different administrator and may also decide whether to appoint a consultative committee of creditors to assist the administrator. Although the committee cannot give directions to the administrator, it can compel the administrator to report on matters relating to the administration. The committee is also in a fiduciary relationship with the creditors and thus cannot profit from their role.
The second creditors’ meeting must be convened by the administrator within five business days after the ‘convening period’. The convening period is 20 business days from the date the administration begins, and the same notice requirements apply. This is extended to 25 business days if the administration begins in December or occurred less than 25 days before Good Friday. The notice of the meeting must be accompanied by a report setting out the company’s business, property, affairs and financial circumstances and a statement expressing the administrators’ opinion on each of the options available to the creditors (executing a DOCA, returning control of the company to the directors or winding up the company). If the administrator proposes a DOCA, details of the proposed DOCA must also be provided. At the meeting, the creditors decide and vote on which of the three available options they wish to pursue. The administrator presides at both the first and second meetings.
The reporting obligations of an administrator include the following:
- lodge notice of appointment with ASIC by the next business day following appointment, and publish on ASIC’s insolvency notices website within three business days;
- prepare and lodge a report with ASIC where it is suspected that an officer, employee or member of the company has committed an offence in relation to the company; and
- where the creditors vote to wind up the company, to lodge a copy of that resolution with ASIC within five business days of it being passed.
In a creditors’ winding up, no meetings of creditors are automatically held. A liquidator must hold a meeting if requested by a creditor with a minimum percentage of overall debt by value and if the liquidator considers that it is reasonable to do so. It would not be reasonable for a creditor to request a meeting if complying with the request would prejudice the interests of one or more creditors or a third party, there is insufficient property to hold the meeting, a meeting of creditors dealing with the same matters has been held or will be held within 15 business days, or if the request is vexatious.
A liquidator must send the following to creditors:
- within 10 business days of their appointment, notice of their appointment, information about creditors’ rights, and a summary of the company’s affairs and information about the company’s creditors;
- within three months of their appointment, a statutory report that includes information about the estimated assets and liabilities of the company, inquiries undertaken and to be undertaken by the liquidators, the likelihood of receiving an interim dividend and possible recovery actions; and
- any other reports the liquidator decides or that are reasonably requested by creditors (see below).
These notices and reports must be lodged with ASIC.Meetings and notices - receivership
During a receivership there is no obligation to call a creditors’ meeting, but notice of the appointment must be lodged with ASIC. Reports must be lodged with ASIC during the receivership and notification must be given on its termination.Requests for information
Creditors of a company in administration or liquidation have a right to request information at any time. An administrator or liquidator must provide the information required if the information is relevant to the administration or liquidation, the provision of the information would not cause the administrator or liquidator to breach their duties, and if the request is reasonable. A request for information would not be reasonable if complying with the request would prejudice the interests of one or more creditors or a third party, if the information is the subject of client legal privilege or disclosure would be actionable for breach of confidence, if the request is vexatious, if there is not sufficient property to comply with the request, or the information has already been provided or is required to be provided within 20 business days of the request. In relation to the last three reasons, the administrator or liquidator will still have to provide the information if the creditor meets the cost of complying with the request.Creditor representation
What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?
Committees in the Australian insolvency regime are creatures of statute and are not seen in the context of representing creditor stakeholder groups as they might be in the United States.
At any stage during the winding up, the members or creditors of the company may request that a committee of inspection be appointed. In such a case, the liquidator must call separate meetings of creditors and members for the purpose of determining whether a committee of inspection should be appointed and, if a committee is to be appointed, the numbers of creditors and members to be appointed and the persons who are to be members of the committee.
In a voluntary administration, a committee of inspection may be formed at the first creditors’ meeting.
The role of the committee of inspection is to supervise and assist the administrator or liquidator. Examples of the types of direction the committee may make include approving the remuneration of the administrator or liquidator, approving the institution of legal proceedings on behalf of the company, and directions as to the compromise of debts owing to the company. Committees of inspection are most often used in large liquidations or administrations where it is difficult for the liquidator to engage with the entire body of creditors on a regular basis.
The committee must have at least two members, drawn from the body of creditors and members. A company can be a member, acting through an authorised agent. Generally, the members of the committee of inspection will comprise those with a substantial interest in the winding up of the company, such as large creditors, employees and members holding a large proportion of the company’s shares.
The administrator or liquidator of the company must have regard to the directions of the committee, but is not required to comply with these directions.
Members of the committee of inspection owe the general body of creditors and members fiduciary duties and therefore must act in the best interests of the creditors and members rather than for their own benefit.
There is no statutory provision governing the remuneration of the committee of inspection. Except with leave of the court, a committee member may not derive any income from their position. They also must not become the purchaser of any property of the company.
It is almost unheard of for such committees to retain counsel and advisers.Enforcement of estate’s rights
If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?
An administrator, liquidator or provisional liquidator can sell or otherwise dispose of, in any manner, all or any part of the property of the company. As a claim available to an estate forms part of the company’s property, a liquidator may assign the claim to a creditor for consideration. The beneficiary of the ‘fruits of the remedies’ is thus dependent upon the terms of the assignment. When the liquidator is without funds, creditors may provide an indemnity or funding to the liquidator so that apparently meritorious claims may be pursued for the benefit of all creditors. In such circumstances, the creditors providing the indemnity or funding may be entitled to receive a higher dividend than they would otherwise receive by operation of section 564 of the Act (see question 38).
In addition to administrators’ and liquidators’ power to assign causes of action, third-party litigation funding has been increasing in acceptability and prevalence since the endorsement of the practice in the non-insolvency context by the High Court of Australia in Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386. This has brought with it increased access to litigation funding for liquidators and administrators.Claims
How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognised? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?
A liquidator will notify creditors of the submission date and may do so by advertising it in a newspaper and also on the centralised insolvency notice website. This date may not be less than 14 days after the date of notice being given to creditors. Once the particulars of a debt are submitted by a creditor, the liquidator may admit all or part of the claim; reject all or part of the claim; or require further evidence to be submitted in support of it. If further evidence is required, the liquidator must notify every creditor in writing of the day on which the formal proof must be submitted. A liquidator must deal with submitted formal proof of claims within 28 days of receipt.
Where a proof of debt is rejected by a liquidator, grounds for the rejection must be provided to the creditor within seven days. A creditor can appeal the liquidator’s decision in court within the time specified in the notice (at least 14 days after service).
It is possible for a creditor’s claim to be assigned in writing. An assignee may apply to the liquidator and the court to have its new proof of debt stand as substituted for the assignor’s proof of debt. Such an assignee will be able to enforce the full value of the claim irrespective of whether it was acquired at a discount (ie, below par).
Claims for contingent debts are admissible in the winding up of a company. When a proof of debt is contingent in nature, the liquidator may either make an estimate of the value of the debt or claim as at the date of winding up, or refer the question to the court for judicial consideration. A creditor aggrieved with the estimate made by the liquidator may appeal to the court. If the contingent event occurs after the date of winding up, the creditor is entitled to prove for the actual amount of the claim.
A creditor can claim for interest accrued after the opening of the insolvency case and there is a prescribed rate in the Act of 8 per cent. Payment of this interest will rank behind all other claims (except subordinated equity claims).Set-off and netting
To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganisation? Can creditors be deprived of the right of set-off either temporarily or permanently?Liquidation
Set-off refers to the right of a creditor to plead a debt due from the debtor as a defence to all or part of the debtor’s claim made against it. Section 553C of the Act provides that statutory set-off is available in a liquidation scenario where there have been mutual dealings between the distressed company and relevant creditor. In such circumstances, an automatic account is taken of the sum due from the one party to the other in respect of those mutual dealings and the sum due from the one is to be set off against any sum due from the other.
Only the balance of the account is admissible as proof against the company or is payable to the company. The Act allows a broad range of claims to be set off. The rule entitles creditors who are also debtors to have preference over the general body of creditors. Only creditors that choose not to rely on their security may take advantage of the rule.
A creditor is, however, unable to claim the benefit of set-off if he or she had, at the time of the relevant transaction, notice of insolvency of the company. Further, a creditor cannot offset any existing claim or debt of the company against new claims or debts that may arise during the period of administration.Other reorganisations
In other reorganisations, there is no statutory right of set off and the creditor must rely on any contractual rights they may have. Those rights will be subject to a statutory lien that has attached to the company’s property at the time that the set off is made. In practice, however, administrators and deed administrators will ordinarily recognise set off as if section 553C did apply, as generally creditors can claim prejudicial treatment if they receive less from administrators or under DOCAs than they would under a liquidation scenario (and often wording similar to section 553C is built into a DOCA).Modifying creditors’ rights
May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?
Generally speaking, unsecured claims rank pari passu (with some exceptions), with secured creditors afforded a level of priority by virtue of the security arrangements in place.
The court has power to change the rank of a creditor’s claim in only very limited circumstances. Section 564 of the Act provides an incentive to creditors to give financial assistance or indemnities to liquidators to pursue asset recovery proceedings or to protect or preserve property. If creditors provide such assistance, the liquidator may apply to the court for an order that the contributing creditors receive a higher dividend from the company’s assets than they would otherwise be entitled to.
In assessing any claim under section 564, the court will consider all the circumstances surrounding the claim. Therefore, it is difficult to assess the frequency and likelihood of success attributable to any individual claim. The courts, in exercising their discretion, will have particular regard to factors such as the amount of risk to creditors, the amount recovered and the proportion between the debts of participating creditors and others, as well as the public interest in encouraging creditors to provide indemnities to enable assets to be recovered. Litigation funding can also be obtained outside the court process (see question 35).
A DOCA may determine the creditors to be paid and how much they are to be paid (noting that a level of protection is afforded to employees unless they agree otherwise). Aggrieved creditors can apply to the court to overturn a DOCA if they are discriminated against.Priority claims
Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganisations? Which have priority over secured creditors?
Under the Act, certain unsecured debts are given priority ahead of other unsecured debts. Sections 556 to 564 of the Act govern this, and the priority debts include expenses incurred by the administrator or liquidator in realising the assets of the company and in carrying on the company’s business and the costs in relation to any applications to the court in respect of the winding up and employee-related entitlements (discussed further below).
A company’s debts to the Commonwealth government do not receive any special priority. Amounts in respect of unpaid income tax rank as unsecured debts and are payable only if there are sufficient funds left over after all preferential debts have been paid.
Certain employee entitlement claims will have priority over secured debts, which are secured by a security interest of circulating assets (ie, receivables, stock, etc).Employment-related liabilities
What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)
Outstanding employees’ wages, superannuation, leave entitlements and redundancy payments are given priority over payment of ordinary unsecured creditors in the distribution of assets in the winding up. Pursuant to the Commonwealth’s Fair Entitlement Guarantee (FEG), when a company is placed into liquidation leaving employee entitlements unpaid, the Commonwealth government, through FEG, can make payments to employees of certain levels of unpaid wages, leave and other entitlements. The Commonwealth then becomes a creditor of the company and is afforded the same priority in the distribution as the employee claims it paid.
Upon the making of a winding-up order by the court, the publication of that order acts as a notice of dismissal of all employees of the company. An employee who was engaged subject to a contract of employment for a fixed term, or was entitled by his or her contract of employment to a period of notice prior to termination of the contract, may lodge a proof of debt for damages for breach of contract. While the appointment of a voluntary liquidator does not necessarily operate as a notice of dismissal, the liquidator has the power to terminate contracts of employment.
In relation to a company in administration and receivership, upon appointment the administrator or receiver takes control of the company’s business, property and affairs. The retention of employees will depend upon the outcome of the administration process. If the business continues to operate, employees may be retained. An administrator and receiver can also terminate employment contracts in the same way as management of the company could when the company was operating as a going concern.
The Act affords a level of protection to employee entitlements following the company and its creditors entering into a DOCA. The Act provides that the entitlements of employees be given certain priorities in a deed, those priorities to be at least equal to what they would receive if the company were being wound up.Pension claims
What remedies exist for pension-related claims against employers in insolvency or reorganisation proceedings and what priorities attach to such claims?
Employee entitlements are afforded a level of priority in liquidations, receiverships and administrations. Under section 556 of the Act, employee entitlement claims are afforded a level of priority over other unsecured claims (noting that expenses of the liquidation still rank higher). A cap applies to the level of employee entitlements that are afforded priority for former officers of the company. In a receivership, employee entitlements are afforded priority over secured claims that are only secured by a security interest of circulating assets (the old floating charge).
A claim for unpaid employee entitlements is lodged in the same manner as other unsecured claims (ie, a proof of debt in the ordinary course). As noted in question 39, a statutory regime also exists (FEG) to supplement amounts available for employee claims.Environmental problems and liabilities
Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?
Ultimate responsibility for any environmental issues will continue to rest with the relevant distressed debtor company. Upon appointment, an insolvency administrator will not automatically assume responsibility for these liabilities but will need to be aware of any such concerns and damage should they seek to continue to trade the company. Should further damage accrue during the course of the insolvency administrator trading the business, they may be held liable in the same way that directors have been held liable pre-appointment. Further, in scenarios where the insolvency administrator seeks to sell or realise the relevant asset, engagement with the environmental regulator will be required where there is pre-existing environmental damage and often remediation will be a contractual condition to the sale.
Creditors will not be held liable for controlling or remediating any environmental damage. The debtor’s officers and directors could potentially be held liable for such liabilities in circumstances where the company enters formal liquidation and it can be shown the company was cash-flow insolvent at the time such liabilities were incurred. Third parties may be liable, but it will depend on the circumstances surrounding the environmental damage and any contractual obligations in place at that time.Liabilities that survive insolvency or reorganisation proceedings
Do any liabilities of a debtor survive an insolvency or a reorganisation?
The liabilities of a corporate debtor do not subsist after a liquidation has concluded. Under either a voluntary or involuntary arrangement, the creditors will receive compensation from the company’s assets in proportion to the debts owing to them in satisfaction of their claims. The company’s debts will be discharged in the context of these restructuring proceedings and thus the creditors’ claims will not subsist after winding up. As noted below, upon deregistration a company will cease to exist as a corporate entity and any surplus assets will vest in the corporate regulator.
Unsecured claims subsist after a receivership has concluded and such creditors may bring an action against the company (noting they are unlikely to do so unless significant assets remain).
The outcome of the second creditors’ meeting during a voluntary administration will determine what creditors’ claims subsist (ie, either a DOCA or winding up is likely to commence).
Under a scheme of arrangement, those creditors whose rights are not compromised or affected will continue to have their original claim against the company.Distributions
How and when are distributions made to creditors in liquidations and reorganisations?
In liquidation, distribution will occur when funds are available. Under a DOCA or a scheme of arrangement, the distribution arrangements are generally set out in the terms of the respective instruments. It is possible for interim distributions to be made as funds become available.
SECURITYSecured lending and credit (immovables)
What principal types of security are taken on immovable (real) property?
The principal type of security that is taken on real property in Australia is a mortgage, for which a registration system exists (referred to as the Torrens Title system). Under this system, a mortgagor who has registered a mortgage with the relevant state or territory land title register grants a legal charge over the land as opposed to transferring legal title to the mortgagee. The mortgagor and mortgagee thereafter both possess a legal interest in the land. The mortgagor is free to deal with the land (subject to any restrictions in the terms of the mortgage itself) and retains the beneficial and legal interest in the land. The mortgagee holds a legal charge that will confer actionable rights in the event of default by the mortgagor.
It is also possible under the Australian system for an equitable mortgage over land to exist. This arises in circumstances where the mortgage is not yet registered but the parties have an intention (often a written agreement) to enter into one or the mortgagor deposits the title deeds with the mortgagee.Secured lending and credit (movables)
What principal types of security are taken on movable (personal) property?
In 2012, the PPSA came into force in Australia, modelled largely on equivalent legislation in New Zealand and Canada. This legislation consolidated all of the existing registers on which security interests were previously registered and amended many of the concepts and terms associated with taking security over assets.Security interest
The PPSA introduced a uniform concept of a ‘security interest’ to cover all existing forms of security interests, including mortgages, charges, pledges and liens. It applies primarily to security interests under which an interest in personal property is granted pursuant to a consensual transaction that, in substance, secures payment or performance of an obligation. It also applies to certain deemed security interests such as certain types of lease arrangement for certain terms, retention of title arrangements and transfers of debts, regardless of whether the relevant arrangement secures payment or performance of an obligation. ‘Personal property’ is broadly defined and essentially includes all property other than land, fixtures and buildings attached to land, water rights and certain statutory licences.
The legislation has introduced a new lexicon relating to security in Australia. For instance, the traditional concept of a fixed and floating charge has now been replaced by ‘general security agreement’ and the PPSA now determines whether an asset is, in effect, subject to a floating charge on the basis that only circulating assets, as defined by the PPSA, will be treated as being subject to a floating charge for the purposes of other legislation including the provisions of the Act that provide priority of certain claims over floating charge assets. Generally, attachment and perfection of a security interest occurs when the grantor and the secured party execute a security agreement, although the parties can defer attachment, and the security interest is registered on the PPSA register. However, security interests over certain assets can be perfected other than by way of registration; for example, by the security holder controlling the relevant asset in the manner prescribed by the PPSA.
The concept of security interest is broad enough to capture pre-existing forms of security and the documentation creating security has not changed significantly (ie, charges, debentures, mortgages and pledges may still be used with certain amendments).
One of the most significant changes implemented by the PPSA is to require the registration of retention of title arrangements to protect a supplier’s title to the relevant supplied goods.
If a security interest is not perfected in accordance with the PPSA, the security interest will, on liquidation of the grantor, vest in the grantor. This has created a paradigm shift for retention of title arrangements as failure to perfect the retention of title arrangement (by registration) will vest title in the relevant goods in the recipient of the goods, despite the agreement between supplier and recipient that the supplier retains title to those goods until they are paid for.Non-PPSA property
The PPSA does not cover security interests in land or fixtures and buildings attached to land and a mortgage over real property must be registered under the Torrens Title system, which operates under Australian law by registration on the relevant state or territory land title register (see question 45).
There are also certain assets such as statutory licences (such as mining licences), which, by virtue of statute, are expressed to be outside the operation of the PPSA and any security interest over any such asset is governed by common law.
CLAWBACK AND RELATED-PARTY TRANSACTIONSTransactions that may be annulled
What transactions can be annulled or set aside in liquidations and reorganisations and what are the grounds? Who can attack such transactions?
The following types of transactions may be held to be void and set aside after a company has entered into liquidation:
- insolvent transactions (which includes both unfair preferences and uncommercial transactions);
- unfair loans;
- unreasonable director-related transactions; and
- transactions entered into for the purpose of defeating, delaying or interfering with creditors’ rights on a company’s winding up.
Uncommercial transactions and unfair preferences are voidable if the company was insolvent at the time of the transaction or at a time when an act was done to give effect to the transaction. The courts have held a transaction ‘uncommercial’ if a reasonable person in the company’s circumstances would not have entered into it. An unfair preference is one where a creditor receives more for an unsecured debt than would have been received if the creditor had to prove for it in the winding up. The other party to the transaction or preference may prevent it being held void if it can be shown that they became a party in good faith, they lacked reasonable grounds for suspecting that the company was insolvent and they provided valuable consideration or changed their position in reliance on the transaction.
Loans to a company are ‘unfair’ and thus voidable if the interest or charges in relation to the loan were, or are, not commercially reasonable. Any ‘unreasonable’ payments made to a director or a close associate of a director are also voidable, regardless of whether the payment occurred when the company was insolvent.
A liquidator can seek a court order under section 588FF of the Act with respect to suspected voidable transactions. Potential orders include the repayment of money paid or retransfer to the company of property it transferred. Orders may also be made varying a contract that is part of the transaction.Equitable subordination
Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganisation proceedings?
No. However, related party claims are likely to be subject to greater scrutiny.
GROUPS OF COMPANIESGroups of companies
In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?
Cross-collateralisation and group guarantees are often sought by lenders into a corporate group. These guarantees provide comfort that a holding company will stand behind special purpose vehicles or operating companies. There is also a statutory form of cross-guarantee lodged with ASIC allowing corporate groups to lodge consolidated financial statements. This statutory cross-guarantee provides for a group to be liable for each other group member’s debts and is designed to afford a level of comfort to creditors providing services or lending to operating subsidiaries.
Further, under section 588V of the Act, a holding company of a company may, in certain circumstances, be held liable for the insolvent trading of a subsidiary.Pooling
As noted in question 50, under the Act a court can make a ‘pooling order’ such that in the liquidation of a group of companies each of the separate group companies are treated as if they were a single company. This means that the creditors of the group will have their claims ‘pooled’ so that, in effect, they are treated as creditors of one entity with a combined pool of assets for distribution.
Notwithstanding that the Act makes no provision for the pooling of assets and liabilities of a group of companies in administration, Australian courts have sanctioned the use of pooling arrangements for groups in administration proposing to execute a pooled DOCA. Ultimately this will be a decision of the creditors voting; however, a pooled DOCA will be persuasive if the return to creditors of the group as a whole will provide greater return than if the individual entities ratified separate DOCAs or were placed into liquidation.Combining parent and subsidiary proceedings
In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?Identity
In insolvency proceedings involving corporate groups, a consolidated group is not considered as a single legal entity. Where companies operate as a consolidated group, the starting legal position is that the ‘separate personality’ principle prevents creditors of an insolvent company from gaining access to the funds of other companies for payment of their debts.
The Act, however, provides for a holding company to be liable for the debts of their insolvent subsidiaries in certain circumstances. These provisions enable the subsidiary’s liquidator to recover amounts equal to the loss or damage suffered by creditors from the parent company if the parent failed to prevent the subsidiary from incurring debts while there were reasonable grounds to suspect that the subsidiary was insolvent.
The corporate veil may also be lifted in circumstances where an insolvent subsidiary is deemed to be acting as a mere agent, conduit or partner of its parent company. Australian courts have, however, displayed greater reluctance than their UK counterparts to lift the corporate veil in these circumstances.
The only form of external administration that expressly permits combining proceedings by parent and subsidiary companies is under a scheme of company arrangement. To enable a scheme, an application must be made to the court requesting a meeting of the creditors and members (refer to question 7). Where a scheme of arrangement is proposed involving a large corporate group, the application may request for the meeting to occur on a consolidated basis. An application for an order to transfer the whole of the assets and liabilities of the subsidiaries to the parent company may also be made when seeking approval of a proposed scheme.
This scheme requires significant court involvement and thus execution is generally slower and more expensive than voluntary administration.Pooling
Pooling of group funds may occur in limited circumstances, as prescribed by division 8 of Part 5.6 of the Act, being sections 571 to 579L. Generally, those circumstances are where there is a substantial joint business operation between members of the same corporate group and external parties, such that members of the group are jointly liable to creditors. The liquidator of the corporate group being wound up makes what is called a pooling determination, after which separate meetings of the unsecured creditors of each company must be called to approve or reject the determination. The court may vary or terminate any approved pooling determination.
In relation to a company in liquidation, the court may make orders for the transfer of assets from a winding up in Australia to an external administration outside Australia, either pursuant to section 581 of the Act or pursuant to the UNCITRAL Model Law, incorporated into Australian law by the Cross-Border Insolvency Act 2008 (Cth).
INTERNATIONAL CASESRecognition of foreign judgments
Are foreign judgments or orders recognised and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?
The Foreign Judgments Act 1991 (Cth) creates a general system of registration of judgments obtained in foreign countries. This act only extends to judgments pronounced by courts in countries where, in the opinion of the governor general, substantial reciprocity of treatment will be accorded by that country in respect of the enforcement in that country of judgments of Australian courts. Judgments of other foreign countries may also be recognised under the common law rules for the recognition of foreign judgments.
The application to register a foreign judgment must be made by a judgment creditor to the appropriate court (usually the state or territory supreme court) within six years of the date of judgment or, if an appeal has been taken, within six years of the last judgment in the appeal proceedings.UNCITRAL Model Law
Has the UNCITRAL Model Law on Cross-Border Insolvency been adopted or is it under consideration in your country?
Australia formally adopted the UNCITRAL Model Law on Cross-Border Insolvency by implementing legislation called the Cross-Border Insolvency Act 2008 (Cth) (Cross-Border Act).
This legislation adopts the Model Law with as few changes as necessary to adapt it to the Australian context. Some of the most important features of the legislation include:
- the participation by foreign creditors in local insolvency proceedings;
- facilitated cooperation between courts and insolvency practitioners from different countries;
- allowing a person administering a foreign insolvency proceeding to have access to local courts and in which circumstances this is possible;
- the setting out of conditions for recognition of an insolvency proceeding and for granting relief to representatives of such a proceeding; and
- the ability to effectively coordinate insolvency proceedings occurring concurrently in different states.
How are foreign creditors dealt with in liquidations and reorganisations?
Under the Cross-Border Act, foreign creditors, save for tax and penal debts, have the same rights regarding the commencement of, and participation in, insolvency proceedings as an Australian creditor. All foreign claims must be converted into Australian currency for the purposes of the proceedings.Cross-border transfers of assets under administration
May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?
In relation to a company in liquidation, the court may make orders for the transfer of assets from a winding up in Australia to an external administration outside Australia, either pursuant to section 581 of the Act or the Cross-Border Act.COMI
What test is used in your jurisdiction to determine the COMI (centre of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?
As noted in question 52, Australia formally adopted the UNCITRAL Model Law on Cross-Border Insolvency by implementing legislation called the Cross-Border Act. Under the Cross-Border Act there is a rebuttable presumption that the centre of the debtor’s main interest is its registered office, or in the case of a natural person, his or her habitual residence. The Model Law is silent on the standard required for COMI determination.
Given this, the Australian courts have looked to and adopted similar reasoning to other jurisdictions when considering COMI (such as the bankruptcy courts in the United States) and have equated the concept of COMI with the principle place of business. In considering where the COMI of a debtor or group of companies exists, the courts will look at a number of factors, including:
- the location of the debtor’s headquarters;
- the location of those who actually manage the debtor;
- the location of the debtor’s primary assets;
- the location of the majority of the debtor’s creditors or a majority of creditors who would be affected by the case; and
- the jurisdiction whose law applies to most disputes.
Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognise foreign proceedings or to cooperate with foreign courts and, if so, on what grounds?
Section 581 of the Act provides that an Australian court may request a foreign court with jurisdiction in external administration matters to render assistance in the recovery of overseas property of the company. In deciding whether to authorise a letter of request, one important consideration will be how likely it is that the foreign court will act upon the request.
The Cross-Border Act provides an alternative method whereby an Australian insolvency practitioner may seek recognition under the Model Law in a foreign jurisdiction and thereby give the foreign court independent jurisdiction to provide assistance. Under the UNCITRAL Model Law, the insolvency practitioner may then have authority to recover assets in the foreign jurisdiction.
In relation to insolvency proceedings conducted in a foreign jurisdiction, section 581 of the Act also provides that an Australian court must assist bankruptcy courts of prescribed countries and has a discretion to assist courts of other countries. The prescribed countries are Canada, Jersey, Malaysia, New Zealand, Papua New Guinea, Singapore, Switzerland, the United Kingdom and the United States. Once again, the Model Law provides an alternative procedure, whereby a representative in a foreign jurisdiction may approach an Australian court requesting assistance in the recovery of property located in Australia belonging to the foreign company. In Re Cow Cho Poon (Private) Limited (2011) 249 FLR 315 a Singaporean liquidator made an application to an Australian court pursuant to section 581 of the Corporations Act seeking declarations that he was authorised to open, close, redesignate and operate certain bank accounts held by the company in Australia. In granting the relief sought, the Australian court noted that to so order would be of utility and would aid the effectuation of the winding-up orders made by the Singapore court. It is likely that a similar result would have been reached had the Model Law been invoked.
While in most cases Australian courts have formally recognised foreign proceedings under section 581 of the Act when requested to do so, there have been exceptions. For example, in Yu v STX Pan Ocean Co Ltd (South Korea), in the matter of STX Pan Ocean Co Ltd (receivers appointed in South Korea)  FCA 680 the court was reluctant to grant additional relief as the relief sought would adversely affect any rights that other Australian creditors may otherwise have had, whether under the Act or otherwise.
There are no reported cases of an Australian court refusing to recognise foreign proceedings or grant relief sought under the Cross-Border Act in relation to a corporate insolvency.Cross-border insolvency protocols and joint court hearings
In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?
Many of the cases involving cross-border elements heard in Australian courts involve the protection of assets and the issuance of injunctions or stay orders. One such example was the case of Lawrence v Northern Crest investments Limited (in liq)  FCA 672, where an interim injunction was granted against the Australian directors of an insolvent New Zealand company restraining them from dealing with the company’s assets, pending an application by the liquidator for orders that the winding-up proceedings in New Zealand be classified as a ‘foreign main proceeding’.
There have been no joint hearings or formal arrangements made to coordinate proceedings with courts in other countries to date.Winding-up of foreign companies
What is the extent of your courts’ powers to order the winding-up of foreign companies doing business in your jurisdiction?
The rise of foreign investment in Australia has also seen a steady increase in the number of insolvencies of foreign companies in Australia. A foreign company that falls within the classification of a ‘Part 5.7 body’, that is, a foreign company that is registered under the Act or carrying on business in Australia, can be wound up under Australian insolvency processes. Once a foreign company carries on business in Australia, it is susceptible to a winding up order, regardless of whether it has subsequently ceased to carry on business in the jurisdiction (see Australian Securities and Investments Commission v Edward  QSC 344). Pursuant to section 583 of the Act, a Part 5.7 body can be wound up where it is unable to pay its debts, has been dissolved or deregistered, has ceased carrying on business in Australia or on just and equitable grounds. Largely mirroring the procedure for winding up an insolvent Australian company under Part 5.4 of the Act, the creditor is required to serve on the Part 5.7 body a statutory demand requiring payment of debt of at least $2,000 within 21 days.
However, failure by a Part 5.7 body to pay the debt within the prescribed period does not result in an automatic presumption of insolvency (as is the case in a winding up under Parts 5.4 and 5.4B), but rather gives rise to a presumption that the company is unable to pay its debts (see Cato Brand Partners Pty Ltd v Air India Limited  VSC 28). Where concurrent foreign and local liquidations are taking place regarding the same debtor and there is inconsistency between Part 5.7 of the Act and the Model Law, section 22 of the Cross-Border Act dictates that the Model Law prevails.
The Australian courts also have jurisdiction to order an ancillary liquidation where a foreign company registered in Australia is subject to a contemporaneous foreign liquidation. Section 601CL(14) of the Act provides that where a registered foreign company is being wound up, dissolved or deregistered in its place of origin, the Australian court must, on application by the foreign liquidator, or by ASIC, appoint an Australian liquidator of the foreign company. The powers of the Australian liquidator are limited, and unless the court otherwise orders, the net amount of all property of the foreign company recovered and realised by the Australian liquidator must be paid to the foreign liquidator.
Update and trendsTrends and reforms
Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?Trends and reforms59 Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?
There are two new pieces of legislation worthy of mention (one introduced, and one pending).
On 5 April 2019, the Corporations Amendment (Strengthening Protections for Employee Entitlements) Bill 2018 (Cth) (the SPE Act) received Royal Assent. The SPE Act introduced, among other things, three significant changes to the Act:
- an extension of the previous criminal offence provision to capture a person recklessly entering into transactions to avoid the recovery of employee entitlements;
- a new civil offence for such action with an objective reasonable person test; and
- an ability for a liquidator, among others in certain circumstances, to seek compensation for loss or damage suffered because of a contravention of the civil penalty provision.
At the time of writing this chapter, the authors note that these reforms have yet to be considered by the courts and, considering the already limited judicial interpretation of the former section 596AC, it will likely remain so for some time. It will be interesting to see, however, if liquidators pursue debts from persons engaging in employee-creditor defeating behaviour.
As part of the 2018-2019 Federal Budget, the Australian government announced a series of reforms to combat illegal phoenix activity (ie, transactions taking place at a time when a company is nearing insolvency that are intended to defeat creditors). As part of the wider reforms, which also includes the reforms noted above in respect of the SPE Act, the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 (the Bill) proposed a power for liquidators to recover property that is the subject of creditor-defeating dispositions (in line with their existing ability to claw back voidable transactions). If passed, the Bill will see the introduction of a new section 588FE(6B) of the Act, which will provide that creditor-defeating dispositions of company property are voidable where they are made while a company is insolvent or where they cause the company to become insolvent or enter external administration within the 12 months after the disposition. The proposed new section 588FDB defines a creditor-defeating disposition as ‘a disposition of company property for less than its market value (or the best price reasonably obtainable) that has the effect of preventing, hindering or significantly delaying the property becoming available to meet the demands of the company’s creditors in winding-up’. The Bill also proposes the introduction of both a civil penalty regime and criminal liability (with recklessness being the fault element) for creditor-defeating behaviour conducted by directors or ‘facilitators’ (ie, pre-insolvency advisers).